Since 1985, the sub-prime automotive finance industry has risen and fallen due to a lack of a disciplined credit policy among publicly traded finance companies. The model that survived the turbulent times of the mid to late 1990's was the basic buy here/pay here self-financing model. The success of this model is largely attributed to the dealer's concern in structuring the right deal to mitigate risk and improve performance. Therefore, the dealer became more focused on deal structure and customer attributes in an effort to minimize risk and increase near term cash flow. As finance companies began to fail in the late 90's, those dealers who had largely abandoned this strategy and moved upstream in credit quality and product, migrated back downstream and regained the discipline that was lost in the overabundance of lending, or simply did not survive.
The traditional concept of considering the “F & I” department as a major profit center moved the emphasis towards upfront funding and ancillary product sales for most franchise and independent auto dealerships. This movement was detrimental to the sub-prime industry, and can be cited as being a major contributing factor to the downfall of the financial institutions that focused on sub-prime during the mid 90's. With credit quality in the country not improving, there still exists a very large (in fact growing) industry for higher risk, sub-prime auto financing.
Today the majority of dealers have two key elements that can allow them to capitalize on this opportunity: 1) access to a growing number of consumers with questionable credit history, and 2) access to trade-in vehicles at a reasonable acquisition price. However, most dealers are not capable of entering this market due to the lack of certain resources vital to making this type of program a success. Those resources include: the ability to raise and maintain capital to run this product, access to a servicing platform sufficient to provide customer service and collections for this customer type, and a lack of historical data to support underwriting and making credit worthiness decisions.
Thus, a heretofore unaddressed need exists in the industry for, among other things, a financial product that allows dealers who do not have the time or the resources necessary to start or grow their own “self-financing” program to enter or expand their penetration in the sub-prime financing industry.